Sunday, December 23, 2012

Don't try this at home, Kiddies: UK austerity update.

The New York Times has a long look at UK austerity program under David Cameron's Conservative government. The New York Times article is here.  Cameron recently announced the austerity would continue for another five years.

The UK Independent has a piece on the UK budget deficit worsening.  The article from the UK Independent is here.

Here is a discussion in the London Review of Books calling the Cameron / Osborne policy a failure.  The story by John Lanchester.  He has a great reference in it to the International Monetary Fund's World Economic Outlook (October 2012) publication. On Page 41, of IMF Outlook,  they discuss the multiplier used calculating the effect of government spending cuts on the larger economy.  The IMF suggests that the GDP reduction effect could be as high as 1.7 times the cut.  In other word, removing 100 Billion pounds in spending would reduce economic activity by 170 Billion pounds.  Not something you want to be doing during a recession.

So you have to ask if the savings are worth crippling the economy.

In our opinion, voters want simple solutions to complicated problems and politicians are willing to provide just that. What is missing are leaders who understand the current crisis and are willing to use it was a "teachable" moment for their voters and drag them along. Remember the days when politicians would lead from the from rather than behind (behind the polls that is).

Thank goodness the US federal reserve has the right idea: Low, predictable interest rates for the short and medium term, short term stimulus until unemployment falls to a certain level and pressure on policy makers for gradually reduce long-term healthcare costs.

Can't have a good post without some charts. Below is a chart of the US GDP against the UK GDP.  You can see both economies were smacked by the recession.

Here another chart of the US Debt to GDP ratio.  The projected trend gradually slopes downward as taxes are increased and healthcare costs are reduced.  

No one knows the proper level of debt to GDP.

And finally the UK debt to GDP ratio which is around 66% but rising.  

So to summarize, no one really knows the proper level of national debt, but the UK austerity program dropped GDP growth and increased the debt to GDP ratio.  The austerity program was not the right move during a recession.

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